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Interesting Roundtable discussing banks, credit, etc...


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Brown is incorrect in his comments.  There is a huge difference between preferred equity and common equity...just ask Level 3 or Abitibi who were paying 12-15% interest on their preferreds.  Removing that interest payment frees up capital that would normally go as interest payments. 


Even debt is significantly different than common equity, since equity is a permanent base of capital, whereas your bondholders can call your loan at anytime.  Interests are also more in line with business operations when preferreds or bondholders get switched to common equity.  If all bank executives had to invest all their assets into their company's common equity and hold it for the rest of their life, do you think they would have sold the esoteric products or subprime mortgages that they did?


Investors take their hits based on what form of investment they own...equity, preferred equity, subordinate debt, senior debt...if the government is bailing out corporations, then it is only fair that losses hit investors in order.  Many equity investors have already been wiped out, now its time for the rest to take their fair hits and not expect a bailout.  Cheers!

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While I disagree with Brown on the extent to which he seems to be taking his argument, how does comparing a very high non-deferable interest payment to a non-cumulative, fully deferable bank preferred make any sense at all?


The reason bank preferred is considered Tier 1 capital is precisely because it's non-cumulative.  Doesn't anybody wonder why all the bank preferred stocks look really similar... it's because all this trust preferred, deferrable crap is considered higher tier capital for banks... and that wouldn't be the case if it were cumulative.


The real question people (I am) should be wondering, is Why TF these banks that are in trouble aren't just deferring their preferred dividends instead of converting their non-trust preferred to common?  That is question.  Tom Brown is right, if you forget about the interest payment on the preferred, there is ZERO difference between common and preferred... and the preferred specifically lets you do this!!!!


I can't figure it out.  It's like the entire reason banks sell deferable preferred was for EXACTLY this kind of time, and now, with the apocalypse on us, the banks aren't deferring their payments.... they are diluting thier shareholders.


And I guess, that is why the G-men are stepping in to protect the country from a capital shortfall that the banks don't appear to be protecting themselves from as is.  (I'm not sure of the governements motives or intentions and that makes me flippin' nervous).


Converting the preferred to common does NOTHING that couldn't have been done another way.


I think there must be something I'm missing here.  I have sold  the majority of my Wells common because I can't figure out what this whole TCE obsession is about... it really makes no sense... just defer the preferred if needed.  The government can count me as a small money manager who would be providing the banks capital, but I am no longer interest because of the non-transparency of what they are doing...the rules seem to be changing in arbitrary ways.




Long WFC/WFCpL/WNAp... just less long than I used to be.



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I agree with you Ben.  If the banks defer the payments on the preferred, then it is the same thing as common, but they aren't doing that...and like you, I'm not sure why they aren't.  Unless much of the preferreds being issued are ONLY non-cumulative because the purchasers demand it.  That's the only reason I can think of why the preferreds would be converted.  Cheers! 

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That and the preferreds grant no voting rights.


With regard to TCE.  Was it not the Treasury/Fed that put pressure on the healthier banks to find Wachovia a new home?  And wouldn't it be magic if you could get one of them to show some value in the purchase price as a calming force for all investors.  Along comes WFC, manages to rig up some way to show goodwill in the purchase (despite writing down Wachovia assets by 17%), much to the Treasury's delight.  Now WFC is being penalized in the TCE calculation by the fact that they show some questionable goodwill on their balance sheet from the transaction.  They should be showing massive negative goodwill, which would actually boost their TCE ratio to the highest ranking in the banking business today.  Arbitrary?   

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While the banks could stop paying the PFD dividends, it would have a big impact across the financial industry - on annuities, pension funds, institutions and individuals who have invested in preferreds for dividend income.


Stop paying on the PFDs and their value goes in the dumpster...The vast majority of pfd ownership is by other banks and insurance companies. They would have to mark down their value and Tier I capital is reduced. (I don't know if the issuing bank carries the pfds at book value (my thought), or marked to market value) - Regardless the banking industry looses Tier I capital. (Can someone help here?)


Also - 'sure we can pass the stress tests, we just need to stop paying the pfd dividend.' Somehow I don't think that would go over very well with the Treasury...

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Guest JackRiver

JR, I always like to hear ideas that are bold and contrarian so I'd like to pepper you with a few questions if I might:  


If the Fed/Treasury know so much about banking then why are we where we are today?  One former head of the Treasury had a seat on the board of a bank that completely blew up and another was former CEO of an iB that pushed for trends and regulations to lead to where we are today.  The former head of the Fed even openly stated in public that his lifelong views of the banking system were dead wrong.  I'd like your opinion on what seems to be a contradiction.  Nassim Taleb once stated that the banking system is like an airplane being flown by pilots who don't know what they are doing.  Why is he wrong?  Paul Krugman was on the cover of Time Magazine suggesting the Fed/Treasury aren't making the right decisions.  Why is he wrong?


Secondly, you make a bold statement in that, from the view of the banking system as a whole, the various ways to finance assets make no difference but it makes a difference to other industries.  You then don't state why.  Why do asset financing differences not matter to the banking system?


Lastly, you seem to believe Ackman doesn't know what he is talking about.  If that is the case, where is he wrong specifically (from a systemic point of view) and what do you think would be a more effective alternative?


Thanks in advance.





Well, I'm not sure I can satisfy your bold and contrarian fix, but maybe a little crazy will suffice.  


Those are all reasonable questions and I'll try to reply by sometime tomorrow.




Jack River

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